The Christian Science Monitor reports the G20 Summit of the world’s 20 richest nations has concluded without much concrete progress to solving any economic concerns. The Chinese yuan wasn’t discussed, nor was the U.S. Federal Reserve and its move to buy U.S. Treasury Bonds worth $600 billion to shore up the economy and jump-start lending. Business Insider has a copy of the official communique from the nations which talks of three commitments in ideology of how to move forward and start the global economy growing again. Some worry the lack of action may lead to countries protecting their own interests over solidifying the world’s economies.
One of the points of the communique talked about moving toward “more market-determined exchange rate systems” and “refraining from competitive devaluation of currencies.” A more fair way of doing business with the world’s largest exporter would certainly help. I read that statement as being about the Chinese and their control of the yuan’s exchange rate.
The Matter of China
The Chinese government has kept a tight reign on its yuan to make China more export-friendly. These massive amounts of exports fuel the Chinese economy and put more of its burgeoning population to work.
Cheaper exports mean products overseas are less expensive and the trade imbalance continues. The value of a yuan has risen 2 percent against the dollar since the Chinese government eased some of its restrictions.
If the Chinese currency rises too much, then exports will decrease. When exports go down, factories produce less and employment ensues. China needs to keep growing.
Enter the U.S. debt. When the Chinese buy U.S. government bonds, they are purchasing a part of the huge debt the government owes. PBS has a report which lists the Chinese as owners of $868 billion in U.S. debt.
Because of this, the United States deals very carefully with China. Should the Asian giant call in its debts, the government would face huge budget cuts and reign in its own currency. Then the United States would import fewer goods, which means China’s economy would also be in a slump since so many of its exports go to the United States.
China likes pleasing its export partners and has the world’s largest population to keep employed. This alone is the reason why they take on so much debt. Because the yuan is so cheap compared to U.S. dollars, the debt is easier to purchase.
The Chinese and U.S. economies are in an eerie dance around the campfire that keeps both parties encircling each other. The fire represents our trade relationship with each other. No one is willing to get closer to the fire, nor is anyone willing to douse it with water. The fire keeps both parties nice and warm for now.
Eventually as the fire gets larger and more out-of-control on its own, or the massive debt and export problem gets too big to handle, then something drastic will have to be done. So far all we have is an agreement without many results from the G20 summit in Seoul.
Either both countries will come to a more balanced trade agreement, or both sides may have to pull back and rely upon their own economies. In this global market, it would behoove China and the U.S. to come to a more equitable agreement or face shrinking economies.
Reich, Robert, “G20 failure moves global economy to brink of protectionism”, Christian Science Monitor.
Weisenthal, Joe, “Here’s The Full Text Of The G20 Communique”, Business Insider.
Yahoo! News, “US ‘encouraged’ at rise of China’s yuan.”
Shell, Elizabeth, “U.S. Debt and the Chinese Government: A Match Made in Purgatory?”, PBS.org.